Defining currency risk and finding ways to minimize it

A foreign currency dealer of the Korea Exchange Bank looks at computer monitors at the bank's dealing room in Seoul November 4, 2011. Photo: REUTERS

In a nutshell, currency risk is a kind of risk that stems from the changes in the valuation of currency exchanges. These fluctuations result from the unpredictable gains and losses incurred when profits from foreign investments are converted from the foreign currency into the US dollar. In order to lower the risk, hedges and other techniques are used to offset any of the gains or losses from the fluctuations.

There are several ways that currency risk can be properly managed. These can be done through the use of currency futures, forwards, options or even currency ETF. Unfortunately, these instruments are quite complicated and expensive for a company looking to hedge their FX exposure or an individual currency investor looking for alpha.

When there is a need to create a hedge as against the risk, the next step is to find the best platform. One such platform provider is FXWELLS, which provides simple and flexible hedges available for corporates with limited liquidity as against currency risks. IBTRADE is yet another platform provider available for individual traders looking to hedge their trading position through FX options.

Finding the right one entails proper research and investigation in order to protect the investment against the negative consequences of the currency risk.